States like Luxembourg, Singapore, Monaco, the United Arab Emirates and Saudi Arabia that face limitations in space and resources (such as power and water), or have disaster-prone areas, may look favorably at cross-border data centers as a possible solution for data-hungry operations. However, such operations also face major challenges, including navigating conflicting data protection laws, complying with data localization requirements, managing security risks and handling complex regulatory environments. Organizations must invest in robust compliance, security and infrastructure strategies to balance the benefits of cross-border operations with the risks of legal conflicts and increased operational costs.
Both data embassies and trusted data corridors are proposed solutions to address concerns surrounding cross-border data transfers, although they operate on different principles. As discussed in a paper issued by the Asean Business Law Institute data embassy is a data center hosted in one country but legally subject to the laws of another country. It is a solution for maintaining digital sovereignty and ensuring a nation’s data remains under its jurisdiction even when physically located abroad.
Trusted data corridors
Trusted data corridors offer a different approach by focusing on establishing “secure and reliable pathways for data to flow between like-minded countries.” This solution, recommended in the “Charting ASEAN’s Digital Future” report, aims to address concerns arising from regulatory uncertainty and the lack of harmonized standards for cross-border data flows.
Key aspects of trusted data corridors include:
- Harmonizing data privacy standards among participating countries. This would reduce the complexity for businesses operating across borders by creating a more consistent regulatory environment. ASEAN countries are already encouraged to continue harmonizing their data privacy standards, and tools like the ASEAN Model Contractual Clauses can be used as a reference.
- Establishing a trusted environment for data sharing. This implies that countries within the corridor would have a degree of mutual confidence in their data protection regimes and enforcement mechanisms.
- Using mechanisms like data certification systems to build digital trust and facilitate online transactions across borders.
Trusted data corridors aim to facilitate secure and predictable data flows by focusing on regulatory cooperation and the alignment of standards rather than physically or legally isolating data within a specific offshore zone like a data embassy. They acknowledge the borderless nature of the digital economy and seek to create a framework for seamless digital trade. This could work within existing political or economic zones such as the European Union or ASEAN.
We cannot ignore the looming specter of a global trading system realignment. Data centers are largely sheltered from tariffs because many key electronic components – such as servers, semiconductors, smartphones, computers and storage devices – remain exempt under recent U.S. trade policies. This exemption helps protect the core operational hardware of data centers from cost increases that would otherwise result from tariffs on imported goods. However, while the core IT equipment remains insulated from the direct impact of tariffs, tariffs still apply to construction materials like steel and aluminum, which can raise the costs of building new data center facilities.
Critically, a core principle of the trade in services is the free flow of data. While the current system for the trade in services has so far remained unscathed, it is not improbable that restrictions on this system could eventually affect the free flow of data.
Conclusion
Operators are opening data centers to meet the world’s demands. They are trying to reduce obstacles to free data flow and enable cross-border data centers to operate through the use of data embassies and trusted data corridors. Whether such measures actually work remains to be seen. In addition, restrictions on the free flow of data could undermine such efforts.
